While the Inflation Reduction Act contains several incentives for “traditional” forms of renewable energy, such as wind and solar, it also contains more robust incentives and tax credits for producers, developers, and investors seeking to build new CCUS facilities.

The passage of the IRA means that carbon capture technologies are within closer reach for industries whose greenhouse-gas emissions are more costly to capture and sequester. Previously, only those sources whose emissions contained a very high concentration of CO2, like ethanol plants, were viable candidates for carbon capture deployment. With the increased credits in the IRA, other industries like steel, cement, refineries, and chemicals may be able to reduce their carbon emissions using CCUS. Specifically:

  • The IRA substantially increases the availability of the federal income tax credits available for domestic CCUS projects (often referred to as “45Q credits”) to $85/ton for sequestering CO2 produced by industrial activity, up from $50/ton.
  • 45Q incentives increase from $35/ton to $60/ ton for utilisation from industrial and power generation carbon capture.
  • 45Q incentives increase from $50/ton to $180/ ton for storage in saline geologic formations from direct air capture (DAC).
  • 45Q incentives increase from $50/ton to $130/ ton for utilisation from DAC.
  • The 45Q credit can be realised for 12 years after the carbon capture equipment is placed in service and will be inflation-adjusted beginning in 2027 and indexed to base year 2025.
  • 45Q’s “commence construction” window is extended seven years to January 1, 2033. This means that projects must begin physical work by then to qualify for the credit.

Another major change in the IRA is the inclusion of a direct payment option for receiving the credit, which will allow the owners of carbon capture equipment to receive their credits as if they were overpayment of taxes. This is significant because under previous legislation the credit could only be taken to the extent it offset current taxes; this limitation would often require the creation of complex “tax equity” financial structures to monetise the credits.

While this is an important change, unfortunately, for-profit, tax-paying entities can only use the direct payment option for five years after the carbon capture equipment is placed in service. Tax-exempt entities such as states, municipalities, tribes, and co-operatives can realise the direct payment option for the full 12 years after the carbon capture equipment is placed in service. Another related provision in the IRA is a one-time option to sell future credits to a third party, but there are unresolved questions regarding the implementation of this aspect.

Additionally, the IRA broadens the definition of “qualified facilities”, that is, those facilities that are eligible to claim the credit:

  • The capture threshold for credit-eligible power generation facilities will decrease from 500 000 tons of CO2 emitted per year to 18 750 tons.
  • For industrial facilities, it will decrease from 100 000 tons of CO2 emitted per year to 12 500 tons.
  • For DAC facilities, it will decrease CO2 capture amount requirements from 100 000 tons captured per year to 1000 tons per year.
  • Power generation facilities seeking to qualify for the credit must meet a capture design capacity requirement of not less than 75% of the CO2 from an electricity generating unit that will install capture equipment.

Taken together, these changes are anticipated to significantly increase the number of carbon capture projects that will enter service over the coming years.

How much carbon can be economically captured and stored?

The IRA is expected to help the USA reduce overall emissions by about 40% below 2005 levels by 2030, compared with the 24%-40% cuts we’re on track for today. But estimates of the role carbon capture will play in achieving this target vary. A widely-cited analysis of the IRA by consulting outfit Rhodium Group concluded that carbon capture could deliver between 4% and 6% of that progress and more in future years. A separate analysis by Princeton University’s REPEAT Project found that the IRA could result in the sequestration of nearly 1 billion metric tons of CO2 by 2030.

The cost of capturing CO2 is strongly influenced by its concentration in the emissions stream. For example, fermentation processes at ethanol plants produce a highly pure CO2 stream that’s relatively inexpensive to capture compared to CO2 from a gas- or coal-fired power plant. In the power generation cases, the fuels are burned in the air, which is mostly non-combustible nitrogen, so the flue gas is also mostly nitrogen. Removing the dilute CO2 from the flue gas requires more equipment and entails higher operating costs.

The table, right (source: Clean Air Task Force), shows estimates of CCS costs for various industries.

CCS with underground storage of CO2 is generally considered to have three stages: capture, transportation, and storage. According to a recent National Petroleum Council report, titled Meeting the dual challenge – a roadmap to at-scale deployment of carbon capture, use, and storage, the costs associated with each stage of the CCUS process are dependent on site-specific circumstances that vary with each project. For example, capture costs vary with CO2 concentrations as noted above, while transport costs vary based on the value, distance, and terrain over which CO2 is transported. Storage costs also vary depending on the location, depth, and nature of the storage formation.

In its analysis, the NPC assessed the costs of capturing, transporting, and storing CO2 emissions from 80% of the largest US stationary sources (see graph below). As of 2019, there were ten large-scale CCUS projects operating in the USA that had captured and stored about 160 million metric tons of CO2 up to that time, according to the NPC, citing data from the Global CCS Institute.

The NPC presented its results as a CO2 cost curve where the total cost to capture, transport, and store one metric ton of CO2 from stationary sources is plotted against the volume of CO2 abatement it could provide (see graph). As explained in the NPC report, the costs for individual projects “will vary based on location factors and the economic assumptions specific to each project.”

Using the NPC study as a guide, it seems likely that the increased level of tax credits in the IRA will lead to a significant increase in CCUS deployment. Nevertheless, the NPC cost curve also shows that credits of $85/ton still leave the vast majority of stationary source CO2 emissions out of reach. If CCUS is to mitigate these emissions, its costs will need to decline or the credits will need to be increased. It may be that the government’s logic is to provide enough incentives to address the lowest-cost emissions reduction opportunities first, rather than waste money by setting the credit at a level that is much greater than needed to incentivise carbon capture deployment. As these low-cost sources are addressed, we may see the credits increased in future years for new CCUS installations that capture the high-cost emissions.

In summary, the tax credits contained in the IRA are a significant step forward in the deployment of carbon capture and sequestration technologies as a means to reduce CO2 emissions. Previous tax credit levels were sufficient to have only incentivised a handful of domestic carbon capture projects, but the new credit amounts and the reduction in the qualifying facility size should encourage the development of several new, economically viable installations.

Authors: Steve Hendrickson president of Ralph E. Davis Associates (RED), an Opportune LLP company, and Bryan Sims content director, Opportune LLP, Houston, TX, USA